The Andersons, Inc.
Q2 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day ladies and gentlemen and welcome to The Andersons Incorporated 2014 Third Quarter Earnings Conference Call. My name is Sheila and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Nick Conrad, Vice President, Finance and Treasury. Please proceed sir.

[Nick Conrad:]

Good morning everyone and thank you for joining us for us for The Andersons, Inc. 2014 second third quarter conference call. We have included a slide presentation that will enhance our talking points this morning. If you are listening or watching this presentation via our web site, the slides and audio are in sync. For those listening via telephone and watching the web cast, you should follow directions sent to you in order to sync the slides and audio. This web cast is available through the investors section of our web site at www.andersonsinc.com. The web cast is being recorded and will be available on our web site. Certain information discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions, weather, competitive conditions, conditions in the company's industries, both in the U.S. and internationally, and additional factors that are described in the company's publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the company's offerings. Today's call includes financial information for which the company's independent auditors have not completed their review. Although the company believes that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it can give no assurance these assumptions will prove to be. On the call with me today are Mike Anderson, Chairman and Chief Executive Officer; Hal Reed, Chief Operating Officer; and John Granato, Chief Financial Officer. Mike, Hal, John and I will answer questions you have at the end of the prepared remarks. Now I'll turn the floor over to Mike for an opening comment.

[Mike Anderson:]

Thank you, Nick. The Ethanol Group had a record third quarter, with operating income of $21.3 million. Margins in the ethanol market were strong, although not as strong as the record margin seen in the prior quarter. The outstanding year-to-date performance of the Ethanol Group has led the company to a nine months earning record of $2.95 per diluted share. Company also paid a 72nd consecutive dividend in October. As part of its growth strategy, the company completed three acquisitions since the end of the third quarter. First, the purchase of Auburn Bean and Grain added six grain and four agronomy locations throughout North Central Michigan. This is an area of strategic significance to the company as it bridges the gap between its existing grain and plant nutrient group assets in the Thompson joint venture in Ontario. This acquisition added grain storage capacity of about 18.1 million bushels, which is a 13% increase, and 16,000 tons of dry and 3.7 million gallons of liquid nutrient capacity, which represents a 4% increase. Further, the majority of the assets of both the United Grain LLC and Keller Grain Inc. were purchased in October, in order to expand the Grain Group's food grade corn business into the Texas market. I will now turn this over to John who will provide details of the total company results.

[John Granato:]

Thanks Mike and good morning everyone. The company reported net income of $16.8 million in the third quarter, or $0.59 per diluted share on revenues of $1 billion. In the same three months of 2013, net income of $17.2 million was reported or $0.61 per diluted share on revenues of $1.2 billion. Through the first nine months, total net income stands at a record $83.8 million or $2.95 per diluted share. In 2013, net income through September was $59.3 million or $2.10 per diluted share. Total revenues of $3.3 billion for the first nine months of the year are $752 million lower than the prior year. The majority of the year-to-year decrease in revenue relates to the grain business, whose revenues decrease due entirely to lower grain prices, which decline by more than 30%, in comparison to the same period of the prior year. Gross profit increased from $73.1 million in the third quarter of 2013 to $84.9 million this year. The year-to-year increase in gross profit this quarter was due primarily to an increase in ethanol margins and space income. Now to a non-GAAP measure, EBITDA, earnings before interest, taxes depreciation and amortization. The company's third quarter EBITDA was $47.2 million, which was slightly ahead of the 2013 quarterly results of $46.3 million. Year-to-date EBITDA totaled a $194.4 million, which is an increase of $39.9 million compared to the prior year's nine month total. Equity and earnings of affiliates was up $1.7 million, in total, $23.9 million in the third quarter. Through September, equity and earnings of affiliates totaled $76.6 million compared to $40 million in 2013. The positive year-over-year change to the first nine months was driven primarily by a significant increase in earnings from the Ethanol LLC investments. It was also impacted by the inclusion of income from Thompson's Ltd., which was added to the company's portfolio in the third quarter last year. There were no short term borrowings in the short term line of credit during the third quarter, which represents a decrease of $12.2 million from the prior year. Other income was $1.7 million compared to $7.6 million in the third quarter last year. The prior year, the Rail Group recognized income of $4.3 million related to the settlement of two non-performing leases. For the first nine months, other income increased $13.5 million year-over-year, primarily due to the $17.1 million pre-tax gain recorded on the partial redemption of the equity investment in Lansing Trade Group. For the third quarter of 2014, the company's effective tax rate was 34.7%, down 1.8% from the third quarter 2013 rate of 36.5%. The lower 2014 effective tax rate is due primarily to increase deductions related to domestic production activities into the benefit of income attributable to non-controlling in, which does not increase the company's tax expense. We are projecting the 2014 tax rate to be 34.2%. The company's 2013 effective tax rate was 36%. The lower effective rate for 2014 is due to the items mentioned in relation to the quarter and to the correction made in 2013, with respect to the accounting for the OC portion of the company's retiree health care plan liability, and a Medicare Part D subsidy. The bridge in this next graph, demonstrates which group's 2014 third quarter income is up or down in comparison to the prior year. The specifics behind these differences would be detailed, as each group's operating performance is discussed. Therefore to better understand the total company's results, Hal will walk you through each of the six group businesses.

[Harold Reed:]

Thanks John. Let's start with the Ethanol Group, which achieved operating income of $21.3 million this quarter. In comparison, the Group reported operating income of $10.9 million during the same three moth period last year. The increased income is a result of significantly improved ethanol margins, strong ethanol production, ongoing service fees and increased co-product revenue. Ethanol margins were supported primarily by strong export demand, lower corn prices, historically strong DDG prices relative to corn, and excellent operating metrics at all four plants. Revenue was $179 million in the third quarter, in comparison to $213 million in the prior year. Revenue declined primarily due to a reduction in the average price per gallon of ethanol sold. Through September, the Ethanol Group has reported record operating income of $75 million on revenues of $595 million. In 2013, the Group had operating income of $24 million during the same nine month period, on revenues of $635 million. At this time, the Group has approximately 85% of the fourth quarter, and almost half of January's ethanol margin risk hedged. The hedges for the fourth quarter were made throughout 2014, consistent with the Group's strategy to lock-in reasonable forward returns when available in the market. The January hedges were added during or since the third quarter. As is standard, the Ethanol Group shut down each of the four plants during the third quarter for scheduled maintenance. The shutdowns were successful, and new daily production records have been set since the maintenance was complete. Due to the plant shutdowns, volume for ethanol, distillers dried grains and corn oil decreased slightly this quarter. The Group however still had record E85 sales, as they continue to focus on this product line. The Grain Group earned operating income of $12.4 million this quarter versus $14.3 million a year ago, despite of a delayed harvest caused by wet weather. The Group had improved space income this quarter, due primarily to higher wheat basis appreciation, as well as new execution on new crop bean sales. The Grain Group also benefited from its equity investments this quarter, income from Lansing Trade Group was down slightly, primarily due to the company's ownership percentage being reduced by approximately 20% this year. Thompson's income improved, as only deal closing expenses were recorded during the same period of 2013. The Grain Group was negatively impacted this quarter by the recording of a $3.3 million reserve for a potential default on the sale of distillers dried grains destined for China. Revenues for the quarter were $575 million, which is down from the $766 million reported in the prior year. This revenue decrease is due entirely to a lower average price per bushel, which decreased by almost 36%. The Grain Group's operating income through the first nine months of 2014, was $34.1 million on revenues of $1.8 million. Comparatively, the Group's operating income through September of 2013 was $24.7 million on revenues of $2.5 billion. The year-to-date results have been positively influenced by the pre-tax gain of $17.1 million from the partial redemption of the Group's Lansing Trade Group holdings. Bushels shipped in the third quarter this year increased by over 11%, as the Group worked to open up storage base for the record 2014 crop. Storage capacity increased slightly since the prior year from 141 million bushels to 142.3 million bushels. This capacity was, as of the end of September, and therefore does not include the 18.1 million bushels recently added by the Auburn Bean and Grain acquisition. According to the USDA crop report issued recently, the harvest for corn is 65% complete. In comparison the corn harvest was 71% complete last year at this time. Yield estimates are currently in the range of 174 to 180 bushels per acre, with total production of approximately 14.5 billion to 14.8 billion bushels. These are record results. Report also shows the harvested beans as 83% complete, which compares to the prior year of 85% complete, as of the same time period. The soybean crop being harvested is also a record. The Plant Nutrient Group had a third quarter operating loss of $100,000, on revenues of $111 million. In the same three month period of 2013, the Group reported a $1.6 million operating loss on $96 million of revenue. Sales volume increased by almost 25% in the third quarter in comparison to the prior year, however, this is partially offset by lower gross profit per ton. Third quarter margins were solid, but do not benefit as much from nutrient price appreciation as was seen in the prior year. This year, the Plant Nutrient Group had operating income of $23.5 million for the first nine months on $530 million of revenue. Last year, the Group generated operating income of $21 million on $538 million of revenue. Through September, volume increased approximately 9% and margin remained relatively flat in comparison to the prior year. The Group has appropriately managed its nitrogen phosphate and potassium ownership position going into the fourth quarter, in order to reduce the risk of lower cost or market losses. Storage capacity from the Plant Nutrient Group increased to 935,000 tons from 889,000 tons, due to the acquisition and expansion of both dry and liquid storage facilities. The reported storage capacity, is as of the end of the third quarter, therefore it does not include the capacity added from the Auburn Bean and Grain acquisition. The Rail Group reported operating income of $4.2 million this quarter, on revenues of $32 million. Last year, the Group reported $12.4 million of operating income on revenues of $48 million. The prior year third quarter results include one time gain of $4.3 million for the settlement of two non-performing leases. Gross profit from the leasing business was down slightly, even though both the average lease and utilization rates were higher this quarter, as the fleet decreased by approximately 500 cars. Further, the leasing business was impacted by $1.6 million in freight costs to return idle cars to service, which is $1 million more than was recorded in the prior year. This quarter, the Group recognized $1.4 million in pre-tax gains on sales of cars and related leases and non-recourse transactions, whereas last year, $2.8 million was recognized on similar transactions. Revenues are lower this quarter in comparison to the prior year, due primarily to lower railcar sales. Through the first nine months, the Rail Group had operating income of $25.9 million and revenues of $11.8 million. In the same period of 2013, operating income was $36.6 million and revenues were $132 million. The results through September include gains on sales of railcars and related leases and non-recourse transactions of $14.7 million. This compares to $17.4 million last year for similar transactions. The Group has 22,139 cars and locomotives. The car total is down slightly, as the Group has scrapped some cars and sold some cars outright as part of their railcar optimization strategy. The average utilization rate for the quarter was 89.9%, which is up from the 86.2% reported last year. The utilization rate at the end of September was 90.1%, which represents the slight increase from the third quarter average. The Turf and Specialty Group had an operating loss of $2.9 million this quarter on revenues of $23 million. Last year, the Group reported loss of $100,000 on $28 million of revenue. Turf product's tonnage was down significantly this quarter, due to both a decline in the contract manufacturing business, and to the reduced need for fungicide and insecticide products based on the weather. The cob business also had significantly lower sales volume due to reduced demand for certain products and lost production due to downtime at the Mount Pulaski facility, so as to make major operational and electrical upgrades. Through September, the Group's operating income was $500,000 on a $109 million of revenue. In the same period of 2013, operating income was $6.1 million and revenues were $118 million. The Retail Group had an operating loss of $1 million on revenues of $33 million in the third quarter. In 2013, the Group had an operating loss of $2 million and revenues of $31 million for the same period. The Group's year-to-date operating loss is $1.7 million on revenues of $102 million. Through the first nine months of 2013, the operating loss was $3.7 million and revenues were $103 million. Now I will turn the floor back to Nick for the treasuries report.

[Nick Conrad:]

Thanks Hal. At the end of the third quarter, net working capital was $257.3 million, an increase of $24.4 million from the 2013 third quarter. Long term ended the third quarter at [indiscernible] a decrease of $91.6 million from the prior year. Year-to-date September 30, the average long term interest rate was 4.54% compared to 4.49% last year. The long term funded debt-to-equity ratio was 0.36 to 1 at September 30, compared to 0.57 to 1 for the same period last year. Current assets totaled $1 billion at September 30th, an increase of $153.4 million from the same period last year. The increase is primarily due to an increase of cash, which increased $192.5 million from the previous year's third quarter. As has been recently the case, the purchases of grain and the delayed price of whole paid contracts again generated cash balances and related grain payables, which we expect to continue into the fourth quarter. In addition, declining grain prices reduced margin requirements. Also during the third quarter, the company received a distribution from its investments in sum of the Ethanol LLCs. Total assets at September 30 were $2.1 billion, an increase of $200.7 million year-over-year. Current liabilities were $791.6 million at the end of the third quarter, an increase of $129 million from the prior year. As a result of lower grain prices, the commodity derivative liabilities current account increased $541 million. Accounts payable for grain ended the third quarter at $222.2 million, a decrease of $19.4 million year-over-year, and a decrease of $370 million compared to the 2013 year end. Total equity was $801.6 million at the end of the third quarter, an increase of $131.3 million year-over-year. Mike will now cover a few points before we take questions.

[Mike Anderson:]

Thanks Nick. I just want to first mention that yesterday, we announced -- our Board has authorized the repurchase of up to an aggregate $50 million of the company's common stock. Primary objective of the limited share repurchase program, is to offset dilution related to the company's recent share issuance, in connection with its acquisition of Auburn Bean and Grain. The program will also enable the company to acquire shares used for its employee long term incentive plans in order to offset dilution. Shares will be repurchased from time-to-time in open market transactions. When and if shares are repurchased, will depend on stock price market conditions and other factors. The authorization for this plan will be in effect for two years. As we mentioned last quarter, the rolled out the new SAP Financial system company-wide and implemented the new grain system at two locations in May. As our focus shifts from development to implementation in 2015, project team size and work effort will remain relatively stable. However, the amount of team [ph] effort to just capitalize will be greatly reduced, resulting in higher expense. Project [indiscernible] expense, along with the amortization of previously capitalized cost and system support cost is expected to reduce earnings per share by $0.25 to $0.35 in 2015, relative to 2014. In the future, the SAP system will be expanded to include other groups, and we are excited about the systems ability to help us connect employees, customers and information, in order to support the company's relationships, growth, and performance for years to come. In closing, I'd like to provide a future outlook, let's begin with the fourth quarter. The Grains Group should benefit from the record corn and soybean crops being received, which should have a positive impact on its fourth quarter results. The record yields being seen should further benefit the Plant Nutrient Group, as farmers will need to replace the nutrients consumed by the group. It is likely we will see less acres planted in 2015. We have 85% of the fourth quarter ethanol margin risk hedged at good margins. However, it will not be at the record margins received earlier this year. We anticipate the Rail Group having a good quarter, but gains on car sales are not expected to be that material. It should be noted that poor railroad service could impact the company in the fourth quarter. Both Grain and Ethanol Groups rely on outbound rail service to turn their inventory, which enables them to effectively serve their customers. Further, the Plant Nutrient Group relies on inbound rail, to ensure nutrients are available to meet customer needs. When all this is considered, we continue to expect record earnings in 2014. Next, I'd like to provide an outlook on 2015. I have already mentioned our increased information technology costs that will especially impact the 2015 and 2016 results, as the grain system implementation is completed. In 2015, the Grain Group should continue to benefit from record 2014 crops, including strong performance from its equity investments. With the need to replace nutrients in the soil, we further believe the Plant Nutrient Group will have a good year. As always however, the performance of our agricultural businesses is dependent on numerous external factors, such as favorable weather. We anticipate the Rail Group having a strong year in 2015, as they will benefit from continued increases in utilization and lease rates. At this time, the Group believes the utilization rates will continue to increase during 2015, and could reach levels in the mid-90s. We expect earnings improvement in both Turf and Specialty and Retail Groups next year. I'd like to conclude the 2015 outlook by focusing on the Ethanol Group. In 2014, we have seen the Ethanol Group exceed just about every earnings and production record possible. Although we can envision setting additional production records next year based on plant improvements, and although we remain positive about the industry -- the corn based ethanol industry, we do not expect to continue to set earnings records in 2015. We are acutely aware that the ethanol business is volatile, making future margins difficult to predict. We do however want to offer up some indicators, that are influencing our current thinking in regards to the ethanol business. First, at this time, forward margins are not providing us attractive opportunities to hedge into 2015. As noted earlier, we have pre-hedged about half of the January production, and that has been done with margins which are closer to historical norms. Second, and quite significantly, we have seen a recent decline in the value of distillers dried grains relative to corn price, due in large part to Chinese import restrictions. During 2014, we have seen distillers dried grain prices in the range of 110% of corn price and often higher. However, with the uncertainty of export demand from China, we have seen distillers dried grain prices more in the range of 80% of corn price looking into 2015. That concludes our prepared remarks. Hal, John, Nick and I will now be happy to answer any questions you may have. So Sheila, we will turn it back to you.

[Operator:]

(Operator Instructions). Your first question comes from the line of Kenneth Zaslow of BMO Capital Markets. Please proceed.

[Kenneth Zaslow:]

Hey, good morning everyone.

[Mike Anderson:]

Good morning Ken.

[Kenneth Zaslow:]

A couple of cleanup questions and then a big picture question. One is, how much was the incremental expenses on the rail car -- the freight costs this quarter, and do you think they are recurring?

[John Granato:]

This quarter was $1 million higher than the same quarter last year.

[Kenneth Zaslow:]

Okay. And then how much do you expect to be impacted with the rail issues in the fourth quarter? You kind of said it, but you didn't give any sort of parameters to build on that?

[Harold Reed:]

Now the rail issue impact for the fourth quarter is primarily related to grain and ethanol, that would be the logistical piece of moving the products. We have seen slowdowns at this point in time. We are doing our best to work around all those. We know it has impacted the entire grain industry to some extent. It's just really hard to tell right now exactly how difficult it will -- it will be a good quarter. Like you said, it just still make it much more difficult than we like it to be, but it will be a good quarter.

[Kenneth Zaslow:]

Okay. And then on ethanol, the sequential decline -- again Hal, I asked you the question last time on the quarter, do you think the margin is sustainable? You kind of said yeah, and we have locked in 75% on our margins, and sequentially, the profitability in ethanol. So far sharper than stable would indicate. Can you talk about that, and then I have my final question?

[Harold Reed:]

Well I don't have the exact quotes in front of me. We did mention the 75% that was booked. I don't think we believe at any point that higher margins from the summer were sustainable, and so the actual margins in the quarter were lower than they actually were in the summer. So that obviously impacted the part that we had booked. I think we also noted this time around that the margins that we have booked in January are more along the lines of historical margins, meaning nothing related to the 2014 margins, but margins that we would normally have experienced previous to the big run up in 2014. I think the other key point on that is, Mike's commentary about the DDG valuation, which isn't always taken into combination, into consideration as people model. But a move in DDG prices from 110% on a sell-side value relative to corn price to something in the neighborhood of 80% of corn value, makes a notable change in the revenues for the DDG segment of the business.

[Kenneth Zaslow:]

Okay, and my final question. Mike, you kind of cut short [ph] of saying that 2015 would be a record year. Is there any reason we would not expect 2015 earnings to be a record year? And then how do you think the --

[Mike Anderson:]

Let me answer that, we would not expect 2015 to be a record year. Couple of things, one, remember Lansing Trade Group. That was unusual gain that we would not expect to be repeated. Of course you never know when you're going to do something out in the future. Two, to be real clear, ethanol had a record year, record year so far, wonderful year. We are friendly in the industry. If you recall several years ago when we were talking about what space income, and we said it's as good as it gets, we said its going lower. We were not at all negative on the industry. We are positive about grain. We are positive about ethanol. But the relationship that occurred is a result of starting two years and they will go into drought, shutting down 15% of the industry or more, greatly reducing our impairing available stocks of ethanol drove up ethanol price relative to oil -- drove up ethanol price relative to corn. Even with high corn prices, DDG shortages appeared, as a result of first the drought, again 15% plus supply goals. There were places where we increased their inclusion rates or DDG, because of lack of availability of corn coming out of the drought year, and [indiscernible]. Some of that is continued, which is positive. But as we replenished the supply of corn, we turned on supply of ethanol because of the plants came back online. Chine does its thing on DDG. We have seen recently a compression between the price of ethanol and the price of corn. In other words, ethanol price coming down more than corn price recently. We see that continuing into next year. Be real clear, what we experience in the ability to sell DDG was fantastic. It's kind of as good as it gets. Before the ethanol industry took off like crazy, DDG regularly traded 100% to 110% of corn that was very small supply. Ethanol industry took off like crazy, and then for a while, it got into 70%, even 60% range. Before the drought, it had stabilized in the 80%-90% range. I do believe that its economic value is over 100% of corn. I do believe over time, you will see a move in that direction. But the increase of supply, by bringing plants on, China out to us as we are going to have a substantially lower price of DDG relative to corn, starting now and into next year. And I don't think that has been plugged into your models. So I don't think we will have a record year. We are going to have a good year in grain. We are going to have an okay year in P&G. We are going to have a good year in rail. I expect some improvement in Turf and Specialty. But -- the other we know in ethanol, is really hard to predict the margin. We didn't see it getting as weak. We didn't see it getting this usually strong. So can't sit here and have absolute confidence. But okay. So I answered the first part of your question.

[Kenneth Zaslow:]

Okay. So even with the capital investments?

[Mike Anderson:]

Yeah. The capital investments are going to be great, they are going to return. I just think that, if you go through your models and you look at what we returned at ethanol so far, which is fantastic, as good as it gets, we expect a good fourth quarter. We expect a sizable drop-off next year, that won't be made up by the capital investments that we have in place so far, and a Lansing one time gain, and SAP costs that we just articulated. So we are not sitting here just negative-negative, but we are expecting that we would have a down year compared to this year's results. Three key things, LPG cents per share; SAP cents per share, and I understand everybody has got different models, we don't give a specific guidance on the model on ethanol, but lower cents per share in ethanol.

[Kenneth Zaslow:]

Okay. I appreciate it.

[Mike Anderson:]

Yup.

[Operator:]

Your next question comes from the line of Farha Aslam of Stephens Inc. Please proceed.

[Farha Aslam:]

Hi, good morning.

[Harold Reed:]

Hi Farha.

[Farha Aslam:]

We are coming into a record grain harvest, and you are coming into this grain harvest with a significantly larger footprint because of your acquisitions. Could you help us frame the opportunity for The Andersons, in terms of earning for the fourth quarter and into next year, with the grain that's coming in and that footprint that you have?

[Harold Reed:]

Thanks Farha. This is Hal. Based upon the slight increases throughout the year and the 18 million bushel increase in capacity at Auburn, we are up in our total storage space. Yes, we have more space available, and the crop has been -- obviously is a record crop, especially notable on the crop side, because we handle more crop than we handle soybeans. Also spreads on the Chicago Board of Trade are wider. They are close to where we have expected them to be. So that spread relationship is, if you check the changes in the spreads or comparison year-to-year in the spreads across the cordoned crop, usually from the December futures to the July futures. You notice that increase and that spread relationship, and that's generally something we will capture, as we carry corn throughout the year. So those spread relationships are good. Actually in some cases, depending on how the weather impacted us, we had slightly lower basis levels in some locations, that will help us as well. But this wet weather, and some of the issues with the railroad shipments have both been a little bit of a negative impact to the big harvest. But again, spreads are better. Base is a little bit lower to start the harvest. Both of those are good. A slightly delayed harvest because of the weather, and some logistical issues with the rail concerns. Those are the negatives, but in total, it should be a good fourth quarter and a good start to next year, with the space income.

[Farha Aslam:]

So we should think good things out of the Grain Group for the next two quarters with this March harvest?

[Harold Reed:]

Yes.

[Farha Aslam:]

Okay. And then just expanding on Ken's question regarding ethanol; could you just give us some color? Because on the fourth quarter margin level compared to third quarter margin levels, where you have locked them in, versus what you are going to realize; because that has been a source of significant volatility in your earnings throughout the year?

[Harold Reed:]

Okay. Well a couple of thoughts. I am looking at third quarter this year versus last year obviously, we gave you that comparison in the call, and we were about 21 million versus about 11 million previous year okay, so that's the historical perspective. We also talked in the call about locking in margins, primarily in January, but also during this year, more in line with historical margins. So at this point in time, it would be not correct to assume that the kind of margins we have already locked in for the fourth quarter represent the high margins that we saw in Q2 and Q3. They are more along the lines of historical margins. And obviously since we don't have it all locked in and current margins are less, that also would have a bit of an impact. So we expect a very good fourth quarter in ethanol, especially compared to all historical measures. But probably not as good as what we have seen from a margin perspective, and what we have locked in so far. Okay, so not as good -- I said probably. So not as good as what you have seen in Q2 and Q3.

[Farha Aslam:]

So you would expect your ethanol earnings in the fourth quarter be down, relative to the third quarter?

[Harold Reed:]

Yes.

[Farha Aslam:]

Okay. And then, just looking at ethanol in a broader sense, you're clearly very cautious on that industry, and are locking in margins that are in normal levels. But wouldn't we see just crushed margins. We have seen them bounce in the last months by about $0.30 in just the last months, because you have seen this huge rally in ethanol, and that's with -- and that factors in the lower DDG price, largely because -- recently, the inventories have come in really very tight. Could it be possible that you are locking in very cautious margins, and leaving a lot of money on the table, if you were more in spot? Because of your very cautious view?

[Harold Reed:]

You mentioned that we were cautious about the industry, and I will restate what Mike said, we are not negative towards the ethanol industry in a long term sense. We believe in that industry, so I don't want to give you the sense that we are negative in any long term perspective relative to the ethanol business. Second, I am going to question the $0.30 bounce that you show in, in the ethanol margins. I can tell you that, I have not seen that. So maybe we could talk about some of the details behind that, because one of the biggest components of that, is this DDG price relationship that we also discussed. But we look long term at the ethanol business very positively. We certainly like that business. We just see that he forward curve currently has very small margins in it for 2015. I realize that the spot market has improved generally from quarter-to-quarter, but we are not seeing the kind of spread between the spot margins and next year's margins that we would see, that would lead us to believe that the next year's margins are going to continue to bounce up to these higher levels that we saw in Q2 and Q3.

[Farha Aslam:]

Okay. And then, when you look out into your M&A outlook, where do you see the greatest opportunity for The Andersons, and where are you focusing your efforts?

[Mike Anderson:]

Well, as we have discussed in the past, because of our portfolio, we broadly looked across all of our business constantly to get the right mix and to look at the right opportunities. We have done some work here this year, as you noticed in the Grain and the Plant Nutrient side, and at this point in time, we have talked about the fact that with the returns, ethanol plant values are high. We know railcar values have increased because of higher rates and demands. So opportunistically, it might seem that still on the nutrient side or maybe on the grain side, there maybe opportunities more in the marketplace. But we look at the portfolio completely and constantly and the whole sense of balancing it and looking for the best place of opportunity.

[Farha Aslam:]

Great. Thanks for the added color.

[Operator:]

And your next question comes from the line of Eric Larson of Janney Capital Markets. Please proceed.

[Eric Larson:]

Hey, can you hear me?

[Mike Anderson:]

Yes.

[Eric Larson:]

Sorry, I think I had it one the wrong mute. Thanks for taking my question. Can we just talk a little bit also about kind of the Plant Nutrient business in a little more detail? Typically, when you have grain prices as weak as they are, have come down relative to, obviously big supplies. Historically, it has been very hard to hold the nutrient pricing, there tends to be a pretty high correlation to corn prices. And I have sort of felt that, you have a natural kind of an offset to maybe stronger grain profits next year with the nutrient business. And I guess I am not getting that same color from how you're describing nutrients for next year?

[Mike Anderson:]

Hal can add to this. I think your observation is right. If you look at that, kind of a positive fertilizer chart against corn, both have come down, corn more, which could suggest with the correlation, maybe there is a little more downside. We are cautious on the ability to get price appreciation. But what's interesting -- and we would expect corn acres will be down next year, which would both suggest maybe some caution. So we are not just wilding bullish on the margin. At the same time in the industry, to some extent, we -- and I think its beyond just The Andersons, we are a little lucky that this harvest got delayed, because there is a challenge getting inventory in position from a worldwide and from a production standpoint, which is creating a little bit of an underpinning to price. And there is no question that inputs of all sorts will come under pressure with lower corn price. At the same time, we have seen this bounce in yield, which then you get to, okay, what's the cash flow that comes from revenue per acre, not just price per bushel. And so, if you look at that this year, that has been, what the big yield increase is, despite the lower price, the revenue per acre has been -- although its down, has been there and will put pressure. So we are also continuing our focus on the specialties, and the industrial [indiscernible]. Then we have got different margin piece to it. So we expect maybe a little, and we have taken a lot of nutrients out of the soil with these yields, which will suggest the need to replace. So I am not disputing a thing you're saying Eric, because I think you are on the money, and maybe suggest some caution. We are going to be cautious on inventory build, for risk of lower cost to market. I am proud of the way the folks are managing it. We are a little, I would say, not bullish on the ability to get appreciation. But we see a decent year coming at us.

[Eric Larson:]

Okay, all right. Then just kind of a follow-up question on, again kind of Thompson's. We don't know yet really kind of what you paid for Auburn Bean etcetera. Obviously you paid -- some of the consideration was in shares, and you have got to repurchase those in the market, etcetera. But would you expect, net-net these acquisitions to be additive to earnings next year, in some way, shape or fashion?

[Harold Reed:]

Yes, we would expect those two to be additive. And there will be details in the Q on the acquisition of Auburn.

[Eric Larson:]

On purchase price and how you paid for it, and that sort of thing?

[Harold Reed:]

Yes.

[Eric Larson:]

Okay. Thank you.

[Operator:]

Thank you. And your next question comes from the line of Brett Hundley of BB&T Capital Markets. Please proceed.

[Brett Hundley:]

Good morning.

[Harold Reed:]

Hey Brett.

[Brett Hundley:]

All right. Mike, I want to go back to this conversation on ethanol, and I appreciate what you are saying about DDGs. I would assume you are going to have help from lower corn next year, and right now, you guys are basing your commentary on the forward strip, which I think is just tough to do, because none of us really have a great idea of where ethanol is going to go next year? We can talk to supply and demand dynamics, but we are looking at a strip right now, that has come in from -- levels that we saw six months ago. And my question is, I added $0.20 to the forward strip, I am right back at margins that are looking pretty darn good. So can you speak to that, and just go through again, your view today, your looking at the forward ethanol strip, but if those prices come up, all else equal, does the drop in corn offset this DDG that you're talking about, and you're able to earn a pretty sizable margin again next year as an industry?

[Mike Anderson:]

Again, I think it should be an okay year for ethanol. So it's relative to what I will call unusually good this year as a starting point. And ethanol, if I look at the relationship on the margin to the corn price versus ethanol price, corn price has come down significantly, and it dropped further faster than ethanol price, and ethanol came down, yet you get a little bounce here. But that relationship has been negative, and I agree on the forward strip, that has been a very hard thing to predict. But I would say, since this ethanol industry took off, not any of your projections would have projected what we experienced in the prior 12 months, and that it was so good. So it's the comment on more to historical norms or the good side of historical norms, not as good as it gets. So my negativism is in relation to what we have experienced as being so good, not negative in the sense of the industry or return on assets or anything like that. The other issue, and I don't know how this is going to play out, but the drop in oil price, not so much an impact in the U.S., we have got a -- besides a mandate, ethanol's cheaper than oil in the U.S. -- in U.S. dollar, but it can have an impact in the ability to export, we will see how that goes. But I don't think it’s a friendly item relative to our ability to export, and we have had some benefit on that. And the DDG thing is -- we will wait and see, but this is one where that component of the margin going out, I think we got a really nice gift pop of a confluence of a lot of factors that I mentioned. Decrease in supply, because of plant shutdown, lack of availability of corn and meal, Chinese, huge demand, which is now shutdown, and they want import licenses for DDG. So we are back, to what I will call a supply situation that is greater than economic demand, which is going to -- in my opinion, likely keep a lid on DDG relative to the corn, probably under the 90% level, as we look out to the next year. And that's occurring in the spot market too, that's not just a forward strip situation. It has happened in just a couple of months here frankly. We did have the benefit of forward sales and DDG that we are working through, that were at nice margins relative to corn, but in the spot, that relationship has changed materially. So I just don't see that piece get in the pop. As far as your corn to ethanol margin, I agree with that. We are not banking our expectation on next year on the forward strip. If we felt that way, we would lock in margins one way, but we are not. We expect the bounce you're talking about.

[Brett Hundley:]

You would expect to get better, you're saying?

[Mike Anderson:]

We are talking about a relative situation here, not an absolute. I would expect the forward strip, for the same reason you said, to get a bounce. In general, that's occurred. Working against that supply situation has increased, but fact is, ethanol is cheap. It’s a cheap molecule, it’s a cheap fuel. We are limited with a blend, well that's real. We will wait and see what the impact of exports are with dropping oil prices. But I'd expect the ethanol-corn relation to continue to be positive for this industry.

[Brett Hundley:]

Okay. And then how -- can we talk a little bit about your rail business? Just trying to put it all together inside of my head. You have a little bit of noise over the short term here, as you pull cars back into production and some increased costs related to timing in Q4. But one of the views that we had, rightly or wrongly on next year, was that some congestion, primarily towards the west, could actually benefit you guys, as it relates to your rail business and your grain business potentially shifting of demand out of the northern plains in your area of the U.S. And then also, just given that you are going to be pulling some cars out of idle and into production, and there should be better lease rates associated with that. Overall congestion could also help, as far as railcar leasing, just given that more railcars would potentially be needed. So I was under the impression that rail could have actually a pretty strong year in 2015. Does any of that not make sense to you, and just what would be your overall thoughts on that?

[Harold Reed:]

Your comments almost all make sense to me. And I think Mike stated earlier that, he would expect next year to be a good year for the rail business. So we have constantly seen utilization rates go higher, we expect that to continue. We have seen average lease rates go higher, we expect that to continue, and so we do expect that base leasing part of the business next year to absolutely have a good year. Yes.

[Brett Hundley:]

Okay. And just switching gears real quickly back to fertilizer. I mean is there -- I know you guys are going to be mindful of inventory, but is there a potential for fertilizer volumes to be up next year?

[Harold Reed:]

I don't see a really -- no I don't see a good possibility that that will happen. I mean, we expect corn acres to be down, at some place in the neighborhood of 5% or so across the country. Now, maybe less in the eastern corn belt, but still, we wouldn't expect the acres to be up. I know that there are people talking about making sure that we get all the nutrients replenished in the soil, but I don't see that as allowing us to have a chance to have a higher volume. We continue to work on our specialty business, we have added some growth in a couple of different locations. So those are all positives, but I don't see in total the nutrient volume across the country are being up next year.

[Brett Hundley:]

Okay. And then just last question for me; on Turf and Specialty, was there business loss there, was that mainly just due to weather?

[Harold Reed:]

No, it wasn't a business loss there. We have some noted volume decreases in our turf fertilizer business, and we noted a lengthy shutdown in renovation in our cob business that decreased actually our operating time. We renovated substantially a cob plant that had us down quite a bit of the middle part of the year. So both businesses were lost because of volume, and in some cases, margin on the turf side.

[Mike Anderson:]

On that weather thing, this was one, a too good weather. We had ideal summer weather for golf course maintenance etcetera, etcetera, and those products that we have, that help deal with bad weather, pesticides, fungicides, etcetera, are high margin products. So that's definitely a piece of it too. We'd expect in the next year to see some improvement in our Turf an Specialty business.

[Brett Hundley:]

Okay. Thank you.

[Operator:]

I would now like to turn the call over to Mike Anderson for closing remarks.

[Mike Anderson:]

Okay, thank you. I want to thank all of you for joining us this morning. I also want to mention for those that are interested, there are appendix slides to this presentation available on the andersoninc.com web site of the investors tab, under the third quarter earnings call replay. As John and Nick shared with all the analysts on the call, Nick Conrad will be retiring at the end of the year, and so he is participating in his last earnings call for the company. I'd like to thank Nick for his years of service to the company broadly and more specifically, to all of you, our owners. Thank you, Nick, and I wish you best in the next stage of your life. Our next conference call scheduled for Wednesday, February 11, at 11

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.